The ECB has been unwilling to restart bond purchases of peripheral euro nations even as markets have spiraled out of control this summer, saying they violate the central bank's governing treaties in that they amount to de facto financing of sovereign states.

Recently, however, the story has changed. The bond purchases have been framed as a measure to ensure the stability of the euro, which is the ECB's mandate. The idea is that fear of a country leaving the euro and redenominating its sovereign bonds in a new currency is being reflected in higher bond yields in Spain and Italy, and that, in turn, is making it difficult for the ECB to conduct effective monetary policy.

The ECB wants to eliminate the premium created by "convertiblity risk" – the risk that a euro member state converts from to a new currency and forces bondholders to take losses.

So, just how much of the increase in bond yields is due to convertibility risk?

In a note to clients, JPMorgan strategist Seamus Mac Gorain attempted to measure the convertibility risk premium. Below is a table summarizing his findings.

According to Mac Gorain, 280 basis points of the 460 basis-point yield on Portuguese 2-year bonds is due to a convertibility premium, more than Spain, Italy, or Ireland. This leads Mac Gorain to "expect the new SMP [bond-buying program] to intervene initially in Portuguese government bonds, following next week's ECB meeting."

JPMorgan

Regarding Spain, Mac Gorain estimates that 200 basis points of the 370 basis point yield on Spanish 2-year bonds are due to fears of convertibility risk, which means the ECB might try to bring yields down to around 1.7 percent.

Italy, on the other hand, has less of a convertibility risk premium than the others, but Mac Gorain still estimates 90 basis points of the 290 basis point yield on Italian bonds to reflect convertibility fears and thus, the ECB could try to bring yields on Italian bonds down to around 2.0 percent.

JPMorgan

The JPMorgan strategist arrived at these estimates by looking at a client survey from mid-July and then looking at Intrade.com data since then to approximate the odds of a euro exit for each of the peripheral countries. Then the assumption was made that a new currency would devalue 50 percent against the euro and a 40 percent recovery rate on the bonds of a country that defaults and exits the euro.

These assumptions highlight the myriad sources of potential error in drawing estimates like this, but Mac Gorain says that is part of the point:

"The key here is that there is considerable uncertainty about the precise impact of convertibility risk on yields. That uncertainty gives the ECB significant leeway in deciding what amount of bond purchases is warranted by convertibility risk. That is particularly so given that its objective is to address financial market fragmentation across the Euro area more broadly, of which elevated peripheral bond yields are just one manifestation."